How do I record the commissions I pay to my sales employee?
A commission is a fee that a business pays to a salesperson in exchange for his or her services in either facilitating, supervising, or completing a sale.
If an employee is receiving a commission, then the company withholds income taxes on the amount of the commission paid to the employee. If the person receiving the commission is not an employee, then that person considers the commission to be revenue, and may pay taxes if there is a resulting profit.
One person sells a 1,000 widget for PQR International. Under the terms of his commission agreement, he receives a 5% commission on the revenue generated by the transaction, and will be paid on the 15th day of the following month. At the end of the accounting period in which that person generates the sale, ABC creates the following entry to record its liability for the commission.
ABC then reverses the entry at the beginning of the following accounting period, because it is going to record the actual payment on the 15th of the month. Thus, the reversing entry is: